Question

Suppose you borrow $ 20,000 at a 9% monthly compound, for 5 years. Knowing that 9% represents the market interest rate, the monthly payment cn current dollars It will be $ 415. 17. If the average monthly general inflation rate is expected to be 0.5%, what will be the annual equivalent of monthly payments equal cn constant dollars?

Answer 1

Monthly interest rate = 9% / 12 = 0.75% per month

t= 5 yrs = 60 months (5*12)

loan amount = 20000

inflation = 0.5%

inflation free rate = (0.0075 - 0.005) /(1+0.005) = 0.0025 / 1.005 = 0.00248756

Constant dollar payment = 20000 * (A/P, 0.248756% , 60)

= 20000 * 0.017962

= 359.24